Japan’s economy has slid into a recession for the first time since 2001. Japanese companies have sharply cut back on spending amid the unfolding global financial crisis. Exports have crumbled as the currency the yen strengthened. The world’s second-largest economy contracted by 0.4 percent between July and September compared with the same period last year; that after declining at an annual rate of 3.7 percent in the second quarter of this year.

Japan’s Economy Minister Kaoru Yosano warned of increasingly tough times ahead: “The economy has continued in a recessionary phase. Looking forward, the downtrend in the economy will continue for the time being as global growth slows. We need to bear in mind that economic conditions could worsen further as the US and European financial crisis deepens.”

The Bank of Japan believes the market turmoil may not be over. The Bank’s Deputy Governor said: “Japan’s financial market is also becoming unstable.” The strong yen has hit exports – one of the main drivers of Japan’s longest economic expansion since World War Two. But Naomi Fink, Japan strategist with Bank of Tokyo-Mitsubishi UFJ, said: “The economy is weakest in the external sector so exports are leading growth downward. I would argue that it is unnecessary that Japan suffer a true full-blown recession. It can, it does, have the means whereby to support consumption.”

Tokyo’s Nikkei share average has fallen by a quarter since the start of October, but after the recession announcement it rose on Monday as bargain hunters bought cheap stocks.

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